Median sales prices usually jump in autumn, to a large
degree because of the seasonal increase in luxury home sales, and that is what
happened in October. The combined house and condo median sales price was up 6% from
October 2015, but substantially unchanged from the previous peak median prices
achieved in spring 2015 and spring 2016.

Click on the map below to access our updated Bay Area &
SF home price maps

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Overview

The six weeks from mid-September to Halloween constitute the
heart of the relatively short autumn selling season, with the market typically
going into semi-hibernation from Thanksgiving through mid-January. (Sales still
occur during this period and it can be an excellent time to buy with the big
drop in competition.) Generally speaking, this autumn experienced further
cooling in SF market conditions: October saw significant year-over-year
declines in accepted-offer and closed-sale activity, and significant increases
in price reductions and listings expiring without selling. Condos appear to be
most affected on all these counts, with some decline in condo values: This situation
is certainly being exacerbated by new condo projects coming on market at the
same time that buyer demand has been softening.

The house market has continued to see declines in listing
inventory and to shrink as a percentage of total home sales, thus becoming a
scarcer commodity. It has performed much better, especially in more affordable
neighborhoods. And sales of luxury houses suddenly spiked dramatically in
October, though this appears to have been mostly driven by a huge surge in such
listings in September. This jump in expensive house sales drove the median
house sales price to its highest point ever in October, to just over $1.4
million. The condo median sales price in October, at $1,150,000 was above that
of October 2015, but a tad below its all-time high in June. Please note that
median sales prices are not perfect measures of changes in fair market value, since
they fluctuate for a number of reasons, including seasonality and significant
changes in the inventory of homes for sale.

Case-Shiller Index numbers all refer to a January 2000 price
of 100, and track appreciation
since then. Thus 243 on the chart signifies
a price 143% above that of January 2000.

As mentioned in earlier reports, the highest pressure of
buyer demand has shifted in the past year toward more affordable homes, and
that is now showing up in the different price movements of low, middle and
high-price tier houses. The Case-Shiller Index does not measure median sales
price changes, but has its own special algorithm to determine same-home appreciation.
This short-term chart illustrates how lower-priced houses have continued to
appreciate rapidly, while mid-price and high-price houses have recently more or
less plateaued, and condo prices have declined. The Bay Area Index for August
2016 was published in late October.

This report will generally consider houses selling for $3m
or more, and condos, co-ops and TICs selling for $2m or more, as constituting the
luxury home segment in the city. They total just under 10% of total home sales.
For the ultra-luxury designation, houses are bumped up to $5m or more, and
condos, co-ops and TICs to $3m or more. These price segments total 2.6% of
total home sales.

Pursuant to a big jump in new high-end home listings in
September, luxury house sales in October, suddenly hit their highest point in many
years, if not ever. This is illustrated in the red line in the chart above.
Luxury condo sales reported to MLS, as seen in the blue line, were higher than
in October 2015, but far below peaks hit in previous spring selling seasons.
However, this does not count new-project luxury condo listings unreported to
MLS, which are playing an increasingly large role in the market and creating substantial
competition for resale luxury-condo listings.

The past 14 months has seen the Chinese stock market crash,
the oil price crash, Brexit, high U.S. financial market volatility, a slowdown
in the Bay Area high-tech boom, and enormous election-related anxiety. It is
difficult to tell exactly how these events may have affected real estate
markets. However, despite significant affordability issues and the transition
to less heated market conditions - as illustrated in the analyses of this
report - so far, we have seen no sign of anything approaching an impending
crash in our local market.

Listings vs. Sales: The overall inventory
of house listings has persisted in declining, while house sales are basically
even year-over-year. Condo inventory continues to climb (without including new
project condos not listed in MLS), while sales have been dropping.

Percentage of Sales over Asking Price:
Condos saw dramatic drops in this metric, illustrating a significant decline in
buyer demand and competition.Overall, houses
have seen a negligible decline, maintaining a very high percentage of sales
over asking price. Luxury houses, as mentioned before, experienced a stronger
October market than last year.

Median Percentage of Sales Price over Final List
Price: All market segments saw year-over-year drops as buyers refused
to overbid list prices on the scale of previous years. However, the general
house segment still saw a 9.3% median overbid of list price, which is huge,
even considering that some agents are consciously underpricing their listings.
The other segments, with overbid percentages shrinking toward zero, are seeing
a much greater quantity of sales negotiated below list price. And this does not
include the increasing number of listings that are simply expiring, i.e. with
no sale taking place.

Sales Price to Original List Price Percentage
Overview
All San Francisco residential sales

Months Supply of Inventory (MSI): MSI
measures how long it would take to sell the current inventory of listings for
sale at the average annual rate of sale. All segments ticked up, indicating
some market softening, but the general house market is still well within seller
market territory. The biggest change is in the luxury condo market, where
inventory has been hitting new highs, while sales have generally been declining,
thus putting the segment in buyer market territory. Again, these figures do not
include the large number of new-project listings and sales unreported to MLS,
which would probably increase the condo MSI readings.

Average Condo Dollar per Square Foot Values by Era
of Construction: Newer condos sell for higher average dollar per
square foot values than older condos. Generally speaking, in 2016 there has
been a tick down in this measure of value, which, as seen in the chart at the
beginning of this report, correlates with the conclusion of the Case-Shiller
Index as well. According to The Mark Company, which specializes in the
marketing of new-construction condo projects (for which statistics are usually
not available), average dollar per square foot values for brand new
condos have dropped about 8% over the past year. This would presumably reflect
the fierce competition between projects to sell out their inventories of units.

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Bay Area Median Prices & Affordability by County

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The two following charts are from our recent report on the Bay
Area Apartment Building market, mostly focusing on San Francisco, Alameda and
Marin Counties.

Median Sales Prices for Multi-Unit
Properties
by building size and submarket

Average Asking Rents by Bay Area County

Rent rates in San Francisco have been dropping in 2016 after
peaking in 2015, with estimates of the decline generally running in the range
of 3% to 6.5%, but with some city rental agents saying that certain districts
have seen slumps of more than 10%.We
believe there are 3 big factors at work: a rush of large, newly built apartment
buildings coming on market; a softening of demand as hiring trends have
fluctuated; and affordability issues that have caused more prospective renters
to simply turn away from living in the city, their first choice, and look
elsewhere. However, even with the recent decline, the city still has the
highest rents in the country.

We hope you will forgive our celebrating the fact that
Paragon, which opened its doors in 2004, represented buyers and sellers in
closing more in San Francisco home sales in October than any other brokerage. [Total
dollar volume residential sales reported to MLS, per Broker Metrics.]

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These analyses were made in good faith with data from
sources deemed reliable, but may contain errors and are subject to revision. It
is not our intent to convince you of a particular position, but to attempt to
provide straightforward data and analysis, so you can make your own informed
decisions. Median and average statistics are enormous generalities: There are
hundreds of different markets in the Bay Area, each with its own unique
dynamics. Median prices can be and often are affected by other factors besides
changes in fair market value, and longer term trends are much more meaningful
than short-term. It is impossible to know how value statistics apply to any
particular home without a specific comparative market analysis.

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